It’s normal for financially-sound companies to hold some cash on their balance sheet. But occasionally I come across companies where cash forms an unusually high proportion of the firm’s total assets.
This often intrigues me. I always aim to invest in companies with strong balance sheets. When I see businesses with a lot of cash, I can’t help wondering if they offer some kind of hidden opportunity or overlooked advantage.
To take a more systematic approach to hunting for cash-rich firms, I recently created a screen to highlight companies with a high proportion of cash relative to their total assets plus strong fundamentals and positive momentum.
In this piece I’ll explain what I found and highlight a number of stocks that could be worth further consideration.
Screening for good, cash-rich companies
After a little digging around in Stockopedia’s database, I found nearly 200 UK-listed companies where last-reported cash represented more than 25% of total assets – in some cases, over 50% (excluding financials, where different rules apply).
At first glance, this seems a little odd. After all, cash – in itself – is not generally a productive asset for a business.
While positive interest rates mean that cash now generates useful levels of interest income, I’d always hope that a decent business will be able to generate higher returns by deploying excess cash to expand its business – or else returning it to shareholders.
When I looked beneath the surface at some of these companies, things became clearer. A fair number of them were unprofitable micro-cap businesses relying on regular cash infusions to survive. Many – and I say this politely – were just not very good businesses.
In total, 76 companies had a StockRank of less than 20. I ruled these out immediately.
Of the remainder, I found that some of them do have good reasons for holding plenty of cash, while for others their reasoning is less clear.
Similarly, while some management teams skilfully manage their liquid assets for the benefit of shareholders, some appear unable or unwilling to do so.
To narrow down my list further to a more manageable size for further research, I created a simple screen with just five rules:
You can see and copy this screen…
